Budget 2012 preview: What will Chancellor Osborne announce?

By Ben Salisbury

The background

Last year the Chancellor, George Osborne presented what he dubbed a “budget for business”.

This included a two pence cut in corporation tax, the creation of 21 new enterprise zones and the announcement of 250,000 new apprenticeships to be created over four years.

There was precious little for ordinary people to cheer with the biggest headlines going to the Chancellor's decision to cut fuel duty by one pence. Mr Osborne also raised the personal allowance from £7,475 to £8,105.

Then, as now, Mr Osborne’s desires and plans were thwarted by the economic realities. The cornerstone of the Chancellor’s policy remains a commitment to keep the government deficit in check and to ensure that the deficit is not increasing by the end of this parliamentary term in 2016-17. Most experts expect to see fiscally neutral budgets for a few more years, dictated by the economic realities.

Recent public finances data is encouraging. Mr Osborne looks set to undershoot his target of the public sector net borrowing requirement (PSNBR) to be about £5 billion below this year’s revised target of £127 billion. He could have about £5 billion to play with and he then needs to decide if this will be used to pay down government debt or fund investment.

The Office for Budget Responsibility

The OBR now have the Chancellor’s plans and will be busy over the next few days working out the costs and how this affects growth forecasts. The Chancellor will be hoping that this does not result in any further downward predictions from the OBR. The Chancellor is required to balance the structural current budget at the end of the five year cycle.

The Chancellor is also required to have the deficit falling as a percentage of net GDP by 2015-16. The latest figures indicate he is just about on target.

What will the major announcements be?

The Chancellor has very little “wiggle room” and he has already said that there will be no unfunded giveaways.

Last week’s announcement by Fitch that they think the UK has a one in two chance of losing its triple-A credit rating will play heavily on Mr Osborne’s mind and inform his choices as the triple-A credit rating is one he cherishes, even if it is perhaps less important than it was in affecting government borrowing costs, as very few countries still hold the rating.

Budget 2011: Key points at a glance

Personal allowance

The Liberal Democrats are pushing for this to be increased as quickly towards £10,000 as possible, they want the income tax limit raised to this level by the end of parliament. This is one area that the Conservative coalition majority are likely to give some ground, but how much?

The personal allowance is set to increase by £700, from £7,475 to £8,105, giving most taxpayers an extra £140 a year of net pay.

This is likely to be paid for by a further reduction in the amount an individual can save into their pension each year. When he first took office Mr Osborne cut the annual allowance from £255,000 to £50,000. He is likely to cut it again this time, but again, by how much is a moot point.

Cutting it to £40,000 would raise £600 million for the Treasury, but cutting it to £30,000, a move the Liberal Democrats would like to see, would raise more funds.

50p tax rate

This is one of the hot pre-budget topics this year and is also potentially one of the most politically explosive. Cutting taxes of the well paid in the aftermath of the worst financial crisis for 70 years is bound to polarise opinion.

Indeed, it goes against the government’s mantra that “we are all in it together” when it comes to austerity and improving the nation’s finances.

However, a report commissioned by the government is expected to confirm the widely-held view that the 50p rate brings in less revenue than the 40p rate as the rich find ways of mitigating the rate and because it discourages successful businesses to locate and expand in the UK. Mr Osborne has faced fierce criticism from entrepreneurs over the 50p tax rate.

It is possible the Chancellor could decide on a compromise and reduce the rate to 45p, but perhaps this would be viewed as the worst of both worlds. If he does decide to scrap the 50p tax rate it is likely that new taxes will be introduced for high earners.

These could include lowering tax relief available for individuals earning more than £100,000 and funding initiatives to clamp down on tax avoidance by the rich.

If the 50p tax rate is cut it could be replaced by a minimum tax rate for the wealthy, dubbed a “tycoon tax” by the Liberal Democrats or a higher council tax rate on very expensive properties.

Free Guide: Top investment ideas for your ISA

Child benefit

One of the more contentious measures previously announced is to strip families of child benefit if one person earns more than £42,000, pushing them into the higher tax rate. This is a policy that affects middle-class, middle-income families, a demographic important to any political party wanting to win an election.

The policy has been criticised in that families with two people earning, say £35,000, would not lose the benefit despite having a much higher combined income than a family with one high earner but where the other partner stays at home.

The government may decide to raise the threshold from £42,000, perhaps to £50,000.

Business investment

The Chancellor desperately needs to find some policies that allow businesses to borrow to invest and grow. The Chancellor has been reasonable successful in his austerity policies but Labour and other critics of the government have had some success in developing their argument that the economy would be in a better state by following policies that did not cut “too hard and too fast” but that encouraged growth.

Although the first two months economic indicators point to resilience in the manufacturing, construction and services sector and the threat of a double-dip recession has receded, growth, the driver of economic prosperity, is proving hard to find.

Credit easing

The centerpiece of the Chancellor’s plans for business is the credit-easing scheme he presented in his Autumn statement a few months ago. This will make available £40 billion of cheap loans to businesses with a turnover of less than £50 million. The money will be diverted from the Bank of England’s quantitative easing (QE) programme and will initially be for £20 billion but this could be doubled over time.

Most of the major banks, including Lloyds, RBS, Santander and Barclays have agreed to be a part of the scheme. These banks will be able to borrow on the wholesale market using the government’s triple-A rating to secure cheaper borrowing, to borrow at around two per cent rather than the current level of four per cent they would pay without the government guarantee.

Under the scheme the savings are to be passed onto the companies borrowing and estimates suggest this will lower the cost of borrowing for small companies by around one per cent with the remaining one per cent being the fee the banks pay to the government.

Corporation Tax

Corporation Tax will fall from 26 per cent to 25 per cent in the 2012-13 financial year and to 23 per cent over the lifetime of this parliament but it is possible that Mr Osborne will announce further reductions for future years. Each one per cent reduction costs the government around £800 million.

Unemployment measures

Unemployment is continuing to rise and it is likely that Mr Osborne will try and build on last year’s apprenticeship initiatives with further measures to boost jobs for young people in particular. One possibility is to reduce employers national insurance contributions.

Pensioners

The state pension is due to rise in line with the inflation rate in October. The consumer prices index (CPI) was close to its peak of 5.2 per cent then, so state pensions will rise by a higher level than the current rate of inflation which will be welcome news for pensioners but will be relatively expensive for the Treasury.

Savers

There is not expected to be much in the budget for savers apart from an annual increase in the ISA allowance.

Tax relief

With the likelihood that the annual pension contributions allowance will be reduced, advisers expect there to be a rush of pension savers paying in up to £50,000 before the limit is reduced on Wednesday.

Similarly higher earners are being urged to take advantage of the 50p per cent tax rate by paying higher pension contributions that qualify for 50 per cent tax relief in case the 50p tax rate is reduced in the budget.

It is possible Mr Osborne will curtail tax relief on the pension contributions of employees earning more than £100,000.

Cigarettes and alcohol

Duty on these items is expected to be raised by two per cent above the retail prices index (RPI) measure of inflation. This is a fairly predictable move on what are known as “sin taxes.” It is possible that minimum pricing will be introduced on cheap alcohol as the government attempts to tackle the problem of binge drinking.

Fuel duty

Despite fierce lobbying the Chancellor is expected to resist calls for a cut in fuel duty. He will argue that he has already deferred a planned 3p rise in duty per litre of fuel from January to August. He has also ended the “escalator” system introduced by Labour which sees fuel duty rise by one penny above the rate of inflation.

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